The Worldwide Savings Crisis

Monty Bennett CEO, Ashford Group of Companies
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As the Federal Reserve contemplates its first interest rate hike in years and presidential candidates begin formulating their economic platforms, it’s time to evaluate the hidden obstacle on our path to growth.

Whether federal policymakers know it or not, we are in the midst of a massive financial crisis. But it’s not exactly a debt crisis. It’s more of a savings crisis. That’s right, savings

Never in the world’s history has there been this much savings. While we often obsess about the growing massive worldwide debt of more than $200 trillion, we typically forget the flipside: one investor’s debt is another’s savings. 

The concept of saving for retirement is relatively new. Historically, people worked until they died. It’s only in the last half-century that the notion of retirement for the masses has developed. Since then, U.S. retirement savings have approached $25 trillion as individuals and governments amass future retirement benefits.

Our penchant to save, coupled with the ever present desire to borrow, has created record debt and savings both in absolute terms and as related to the size of our worldwide gross domestic product. Therein lies the rub: we’re drowning in debt. Since the Great Recession, global debt has climbed by nearly $60 trillion. Secular stagnation is the result.

The large debt load of borrowers combined with a muted desire of savers to spend has triggered weak demand, which in turn has sparked anemic growth and low inflation.  In addition, savers who desire to lend are frightened of the landscape. They have lent so much over time that all of their borrowers appear to be risky bets – and many of them are. 

So what should savers do? The answer is that they need to spend in order to boost Gross Domestic Product (GDP), thereby rationalizing the sky-high debt-to-GDP ratios. Yet a huge institutional bias to save exists. 

To discourage this, monetary policymakers should take interest rates into negative territory. This may sound like an unorthodox approach but consider that they’ve already gone this route in Europe to help jumpstart various economies. 

The Federal Reserve needs to take similar action to force savers to spend. Under these circumstances, if savers still refuse to spend, their pools of savings will be whittled down in size everywhere by the level of negative interest rates.  Consequently, no matter how these players react, the United States debt-to-GDP ratio will improve.

Admittedly, this type of policy will likely cause enormous pain for investment capital, especially for retirees and pension funds which need to meet future obligations for their beneficiaries. But what other workable solution is there?

As a society, we have saved way too much and, along the way, our earned rates of return were artificially high. Borrowers have been able to afford these artificially high rates for some time because they could get more loans to service their debts. This paradigm no longer exists.

The chickens have now come home to roost. Sadly, we must pay the price for these elevated, unnatural rates of returns we’ve received for decades.  Today, borrowers are in the driver’s seat. We now need bold monetary policy decisions to help restore balance and much-needed growth.

Monty J. Bennett is founder, chairman and CEO of the Ashford Group of Companies, with almost $6 billion in assets under management. He is also a Global Advisory Council member of HOFTEL, a worldwide hotel ownership group.